Which issue will impact the pork industry more?

Monday, December 3, 2012

by RANDY DUFFY

Two of the biggest challenges facing the pork industry are high feed costs and the elimination of gestation crates. High feed costs are currently the most pressing issue. The South American corn and soybean harvest in early 2013 and next fall's U.S. crop should hopefully bring costs down.

Using data from the OMAFRA farrow-to-finish swine budgets, the five year average from 2008 to 2012 for Ontario feed costs is about $1.14 per kg dressed weight. During the previous 10 years from 1998 to 2007, the figure was about $0.88 per kg dressed weight. Based on current dress weights, the last five years have resulted in feed costs increasing by $25 per head. Going forward, feed costs are expected to remain at a higher level as demand for corn has permanently increased largely due to ethanol production.

These higher feed costs will no doubt cause some producers to decide to exit the industry. Some or all of this lost production may be replaced by consolidation, expansion or increased productivity. Eventually, retail, wholesale and farm level pork prices will all need to rise to a price level sufficient to cover these increased feed costs. However, as consumer pork prices go up less product will be consumed.

The elimination of gestation crates may have a larger impact than higher feed costs on the long term structure of the North American industry. This will be one more regulation added to the list of those faced by pork producers. Producers will have to incur additional costs to renovate their current facilities and will be required to produce fewer pigs in the same amount of space they currently have. The margins in the pork industry in recent years have not been sufficient to allow producers to reinvest a lot of money in their facilities.

While world pork production and consumption has been experiencing a long term increase, the outlook for North America is quite different. The North American consumer will consume less pork at a higher price based on a more strict animal welfare standard. It remains to be seen if consumers will pay a higher price for pork since they have grown accustomed to seeing regular lower priced features on premium cuts like tenderloin, loins and ribs by retailers.

The long term cost to produce pork in North America is going up as a result of both higher feed costs and the elimination of gestation crates. The long term trend for domestic consumption in North America is going down. If production is maintained at its current level, this will require an increasing reliance on international pork exports. Will other countries continue to purchase North American pork exports if the price increases over the long term?

In terms of competitiveness, other pork producing countries are also feeling the effects of rising feed costs. However, with the exception of the EU countries, these other regions may not necessarily face the same increased regulatory pressure and costs related to animal welfare issues like the elimination of gestation crates. As a result, North American production is being put at a competitive disadvantage by the stricter animal welfare demands from retailers, large restaurant chains and other pork buyers.

Will these buyers pay a higher price if the elimination of gestation crates results in a $15 or $20 per hog increase in the cost of production for example? What will these buyers do if they are not able to source sufficient quantities of non-gestation stall produced pork from North American sources? Will they source lower priced pork from countries with less stringent animal welfare standards?

In summary, the pork industry will continue to adapt and change in order to mitigate feed costs in the short term and consider viable housing options in the long term. It appears though that pork buyers have not anticipated the long term consequences of their new purchase policies. BP

Randy Duffy is Research Associate at the University of Guelph, Ridgetown Campus.